Investor & Startup Due Diligence

It is an independent check, before an investor commits money, on whether the startup's financial numbers, tax compliance, cap table, and legal documentation are actually what the founders say they are. It covers whether revenue is real and collectible, whether tax filings are current, whether the shareholding table matches what is actually filed with the government, and whether the company genuinely owns the IP and other assets it claims to own.

Traditionally the investor commissions and pays for diligence on a target it is considering funding. Increasingly, startups approaching Series A or later commission 'vendor due diligence' on themselves before approaching investors — so that issues are found and fixed by their own advisor, on their own timeline, rather than discovered by the investor's diligence team during a live negotiation.

For a full financial, tax, and cap-table review on a seed to Series B startup with reasonably organised records, plan for 3–4 weeks from data room access to final report. A narrower, time-boxed confirmatory diligence run against a signed term sheet's exclusivity window can be compressed to 5–10 working days if the scope is specifically targeted to open items.

In our experience, the most frequent finding is a mismatch between the founders' own cap table spreadsheet and what is actually filed with the Ministry of Corporate Affairs — share allotments recorded informally but never filed via Form PAS-3, or filed allotments that never made it into the spreadsheet the founders show investors. This directly affects the new investor's calculated shareholding percentage.

Yes, and this is a critical check for technology and product businesses. It is common for code, trademarks, or the original product concept to still sit in a founder's personal name, on a personal account, or to have been built by a contractor without a written IP assignment agreement. If the company does not have clean legal ownership of its core asset, that is typically flagged as a critical finding and a condition precedent to closing — not a minor note.

Angel tax was the informal name for Section 56(2)(viib) of the Income-tax Act, which taxed the excess of share consideration received over Fair Market Value as income when shares were issued to a resident investor. The Finance (No. 2) Act, 2024 abolished this provision with effect from 1 April 2025 (Assessment Year 2025-26 onwards), so it does not apply to shares issued on or after that date. It can still be relevant in diligence when reviewing a company's historical rounds — shares issued before that date may carry exposure if the valuation supporting that earlier allotment would not withstand assessment scrutiny, and any pending assessment on an older year remains a live diligence item.

When a non-resident invests in an Indian startup, the share price must comply with FEMA's FDI pricing guidelines — shares cannot be issued below the fair market value certified by a SEBI-registered Category I Merchant Banker or a Chartered Accountant using a recognised valuation methodology (DCF or NAV, as appropriate), as required under the FEMA (Non-Debt Instruments) Rules, 2019. This FEMA pricing floor is a separate requirement from the Rule 11UA fair market value used for domestic income-tax purposes, and both can be relevant on the same cap table if a round mixes resident and non-resident investors. We check whether prior rounds involving foreign investors filed Form FC-GPR within the required 30-day window on the RBI FIRMS portal, and whether pricing on those rounds was defensible. For the current round, we build the FEMA pricing and reporting requirement into the deal timeline from the term sheet stage.

A statutory audit expresses an opinion on whether financial statements are prepared in accordance with applicable accounting standards, for a defined reporting period, under the Companies Act framework. Due diligence is investigative and deal-specific — it exists to answer whether the numbers can be relied upon for a specific investment decision, and covers areas an audit typically does not, such as burn rate accuracy, cap table reconciliation, related-party transaction review, and forward-looking runway analysis.

We grade every finding by materiality — critical, material, or minor — and map each one to a recommended action: walk away, adjust price, add an indemnity clause, add a closing condition precedent, or accept and proceed. We do not hand over an undifferentiated forty-page list of observations for the investor or their counsel to interpret. Before the report is finalised, we walk the client through every material finding on a call, so there are no surprises in the written document.

When PNPC is engaged by the investor for buy-side diligence on a company that is not our existing client, we maintain independence and report findings to the investor who commissioned the work — we do not simultaneously advise the target on remediation in that engagement, to avoid a conflict of interest. When PNPC is engaged by the founders for vendor due diligence, our role is explicitly to help identify and fix issues before investor outreach begins — which is a different, non-conflicted engagement.

A material finding after term sheet signing does not automatically kill the deal — it typically converts into one of a few outcomes: a price adjustment reflecting the quantified risk, a specific indemnity clause in the share subscription agreement protecting the investor if the risk materialises, a condition precedent that must be satisfied before closing (for example, completing an IP assignment or regularising a GST registration), or, for genuinely disqualifying issues, a walk-away recommendation.

Yes. For subscription and SaaS businesses, we specifically test whether reported Annual Recurring Revenue or Monthly Recurring Revenue reflects actual contracted, collectible revenue — as opposed to non-binding pilot usage, heavily discounted pilot pricing presented at list price, or bookings that have not yet converted to a signed, collectible contract. This distinction materially affects valuation, since ARR-based valuation multiples assume the revenue is durable and contracted.

We recompute burn rate directly from bank statements and management accounts, rather than accepting the founders' own burn/runway slide at face value. We test whether the burn figure includes or excludes one-time expenses, whether it accounts for upcoming known cost increases (new hires already offered, planned marketing spend), and whether the stated runway assumes the current round closes on the founders' expected timeline or on a more conservative one.

We map every transaction between the company and its founders, their family members, or any entity a founder controls — a founder-owned vendor receiving company payments, company funds used to cover a founder's personal expenses, a related-party lease, or loans between the founder and the company in either direction. These are not automatically disqualifying, but they must be disclosed, quantified, and priced at arm's length, or ring-fenced and corrected before closing.

A condition precedent is a specific, defined action that must be completed and evidenced before an investment closes and funds are released — for example, 'IP assignment agreement executed by all three founders' or 'pending AOC-4 filing for FY23 completed with MCA.' We recommend condition precedents for findings that are genuinely fixable in a short window and that should not simply be accepted as an ongoing risk after closing.

Both. We verify that the ESOP scheme was formally approved by shareholder special resolution under Section 62(1)(b) of the Companies Act, that the approved option pool size matches what is shown in the cap table presented to the investor, and that individual employees who believe they hold options actually have a signed grant letter with a defined vesting schedule and exercise price on file.

Beyond standard GST and TDS compliance checks, we specifically look at whether the startup's revenue recognition for GST purposes matches its accounting revenue recognition (a common mismatch for subscription businesses billing upfront but recognising revenue over the subscription period), whether TDS was correctly deducted on contractor and freelancer payments that many lean finance teams miss, and — for companies availing DPIIT Startup Recognition — whether the conditions for continuing eligibility for any tax benefits claimed are still being met.

The underlying financial, tax, and legal diligence scope is broadly similar, but a priced round requires the diligence findings to feed directly into a defensible valuation and the specific share terms in the share subscription agreement, while a convertible note or SAFE defers the valuation question to a future priced round — so diligence for a note/SAFE tends to focus more heavily on the terms that will govern that future conversion (valuation cap, discount rate, most-favoured-nation clauses) alongside the standard financial and legal review.

PNPC charges a fixed, agreed fee scoped to the specific engagement — the fee depends on the round size, the number of workstreams (financial, tax, cap table, IP), and the timeline required. The exact fee is confirmed in writing before work begins. We do not charge a success fee contingent on the deal closing, which keeps our incentive aligned with an accurate report rather than a completed transaction.

Yes. For confirmatory diligence run against a signed term sheet's exclusivity period, we scope the review specifically to the items that matter most for a go/no-go and pricing decision, rather than attempting the full-depth review appropriate for an unscoped engagement. This can typically be compressed to 5–10 working days for a well-organised target, with a clear understanding upfront of what depth of assurance that compressed timeline can and cannot provide.

This is common for early-stage companies below the mandatory audit threshold or in their first year of operation, and it is not itself a disqualifying finding — but it does shift more of the diligence burden onto our own independent verification, since there is no auditor's prior work to build on. We rely more heavily on bank statement reconciliation, direct testing of revenue and expense records, and management representation letters in these cases.

Yes, where applicable. We verify that DPIIT recognition is current, that any Section 80IAC tax holiday claim was made for an eligible assessment year with the required Inter-Ministerial Board approval, and that the company continues to meet the underlying eligibility conditions (incorporation age, turnover ceiling, innovation criteria). A lapsed or improperly claimed exemption is a tax exposure that needs to be disclosed and, if material, reflected in the deal terms.

All diligence engagements are governed by a signed engagement letter and, where the investor requires it, a non-disclosure agreement covering both PNPC and the client. Data room access is typically limited to the specific engagement team, and findings are shared only with the party that commissioned the work unless otherwise agreed in writing.

A Quality of Earnings report is a specific subset of financial due diligence focused narrowly on normalising EBITDA — adjusting reported earnings for one-time items, related-party pricing distortions, and accounting policy choices to arrive at a 'true' recurring earnings figure typically used in valuation. Full startup due diligence is broader, covering tax, cap table, legal, IP, and regulatory areas that a QoE report does not touch.

Where an Indian startup has been restructured with a Singapore, Delaware, or other overseas holding entity — commonly called a 'flip' structure — PNPC reviews the India-side operating entity, the FEMA/ODI compliance of the flip itself, and the transfer pricing implications of the intercompany relationship between the Indian operating entity and the overseas holding company. Diligence on the overseas entity's own local company law and tax compliance is typically coordinated with a local correspondent firm in that jurisdiction, with PNPC as the lead coordinating advisor for the India-linked risk.

Yes. For smaller angel cheques, PNPC offers a scoped-down screening engagement covering the highest-risk items — MCA filing status, director disqualification check, GST registration status, and a basic cap table sanity check — rather than the full multi-workstream review appropriate for an institutional round. This gives an individual angel meaningful protection at a cost proportionate to the cheque size.

Not necessarily. Many engagements continue into negotiation support — translating findings into specific representations, warranties, and indemnity language for the share subscription agreement — and, post-closing, tracking whether any agreed remediation items (an IP assignment, a pending MCA filing) were actually completed within the agreed timeframe.

We typically request access to the company's existing accountant, bookkeeper, or auditor to obtain underlying working papers and clarify specific entries, but our conclusions are formed independently. We do not simply adopt the existing accountant's figures or characterisations without our own verification — that independence is the point of commissioning a separate diligence exercise.

For findings with genuine quantification uncertainty — an open GST or income-tax assessment where the eventual liability is not yet determined — we present a realistic range based on the facts available, rather than a single fabricated number, and recommend the deal-protection mechanism (typically an escrow or specific indemnity with a defined survival period) best suited to an uncertain, not-yet-crystallised risk.

We include a clear overall assessment and, for each material or critical finding, a specific recommended action — but the final investment decision always remains with the client. Our role is to make sure that decision is made with full visibility into the risks, not to substitute our judgment for the investor's own risk appetite and investment thesis.

A diligence-only boutique often has no ongoing relationship with the company after the report is delivered, and limited capacity for the India-UAE cross-border layer many of our clients need. A large firm brings scale but often assigns early-stage engagements to junior teams with limited founder-stage context, at a fee structure calibrated for much larger deals. PNPC is a practising CA firm present since 1986, with the same senior team available for the diligence, the closing, the annual compliance that follows, and the next round after that.

Scoping call to define what decision the diligence needs to support. Structured, staged data room request. Financial diligence covering burn rate, runway, revenue quality, and working capital. Tax and regulatory diligence covering GST, TDS, advance tax, and historical angel tax and FEMA exposure. Cap table reconciliation against MCA records. IP and founder documentation review. ESOP scheme and employment documentation review. MCA compliance and director disqualification check. Related-party transaction mapping. Findings consolidated and graded by materiality. Draft findings walkthrough call before the report is finalised. Final report with executive summary and negotiation-support input into deal documentation.